I don’t like making big, bold macro predictions.
There are a lot of unknown variables involved, and even if you forecast my macro forecast, it probably won’t help my portfolio anyway because the market’s reaction to economic data is more important than the data itself.
Last week Michael and I were in Fluency in English with Derek Thompson Discuss the confusing nature of the current macro environment.
You can talk to yourself easily in a number of different scenarios Right now, so it’s not hard to see both sides at the moment of many of the economic arguments.
But Derek has our feet in the fire, essentially forcing us to choose a side: gun to your head — recession or no recession in 2023?
Forced to choose, I said no slack. So did Derek and Michael.
This answer was surprising to each and every one of us because if you had asked me the same question 9-10 months ago, I would have definitely said yes to a recession in 2023.
First, every time we’ve had a spike in inflation historically, we’ve needed a recession and a spike in unemployment to bring inflation down again:
Another indicator that has been blinking red for some time now is the yield curve, which is almost as inverted as ever:
The yields of short-term bonds are much higher than long-term bonds proven track record From front slack (although it does not happen immediately).
If you use market history or economic history as a guide, it’s almost impossible to think we can avoid a recession. Plus, things were already heading in the wrong direction with inflation and then war broke out which made things worse.
It almost doesn’t seem logical to think of a soft landing in the economy where inflation goes down, the unemployment rate doesn’t go up so much and GDP growth isn’t affected much.
I think we could buck the trend here for several reasons:
The job market remains strong. I’ve never seen anything like the current job market. There are still companies that do not find enough employees. Wages continue to rise (albeit at a slower pace). The unemployment rate continues to decline.
Workers have probably never had more bargaining power than they do now.
Just look at wage growth by the gap that separates people who change jobs versus people who stay in their current role:
If you switch jobs now, there’s a much better chance of getting a bigger raise than if you stayed where you were.
This is the first time in 40-50 years that workers finally have the upper hand over their employers.
Can this continue?
I honestly don’t know. If so, it makes sense that we could avoid a major slowdown in the economy.
The consumer was ready to slow down. American families It has never been in a better position to weather high inflation or the possibility of a slowdown in the economy.
Consumers were already repairing their balance sheets by paying down debt and building savings in the aftermath of the Great Financial Crisis. Then the pandemic hit, the government sent a bunch of money, people stopped spending because they couldn’t do anything and the result was trillions of dollars in excess savings.
The combination of pent-up demand and excess savings led to an explosion of spending:
Things are finally starting to slow down a little bit but we’re still close to pre-pandemic spending levels.
And once people get a taste for spending money, it’s hard to put that genie back in the bottle.
The pandemic broke economic logic. One of the biggest economic surprises in a cycle riddled with it is the fact that nothing has been broken yet. There was this assumption that the markets and the economy couldn’t handle higher rates which is why the Federal Reserve kept them so low to begin with.
Not only have borrowing rates increased in 2022, but they have also increased at the fastest pace in history.
But a strange thing happened – nothing broke. Yes, the financial markets took a hit but the economy remained resilient. There was no financial crisis. The unemployment rate has not increased.
And inflation is rolling.
Obviously something could break.
Perhaps all this extra savings simply led to the inevitable delay. It is still possible that the economy may slow here or that inflation may rebound next year. Or we may not see a recession until 2024 or 2025.
All I know is that I wasn’t really thinking of a soft landing when inflation hit 9%, but there seemed to be a chance of avoiding a recession because the job market remained so brisk.
And if we get a soft landing, the expectations of markets, rates and the economy are likely to change. I have more questions than answers if this happens:
What if a recession will be more bullish for the stock market than continued strength in the economy and labor market?
My assumption was that the Fed would have to cut interest rates after something broke in the economy. If nothing breaks, that could be good for the markets, but it could also be a headwind if prices stay higher for longer.
If we don’t go into a recession, does that mean those Investors can get great returns on their short-term savings Will it exist at the present time?
This would be a welcome development for fixed income investors. You can now earn 4-5% on high quality short term debt instruments. If you like to take more risks, the returns are now in the range of 6% to 9% depending on your risk profile.
This is difficult to understand at the moment since long-term returns are now much lower than short-term returns. This cannot continue but the Fed is in control at the moment, so who knows?
Is recession non-inflation?
If “everyone” thinks we’re going to have a recession but we don’t, does that put inflation risks back on the table? Will companies start spending more money? Will families spend more?
It’s strange to think about the fact that managing a soft landing could actually create more economic complications.
Is Inflation Going Down Because Of Or Despite The Fed?
The Fed has stated explicitly that it wants to soften the labor market. And it’s not just that they want wages to stop rising so quickly – they want people to lose their jobs to bring down inflation.
But we see inflation now falling without a commensurate rise in the unemployment rate.
The Fed is probably not to blame for the drop in inflation and has more to do with the pandemic running its course than anything else.
Sign me up for a situation where we can solve this crisis without millions of people losing their jobs.
Michael and I discuss the possibility of no recession in 2023 and more in this week’s Animal Spirits video:
What kind of landing will we achieve in the economy?
Now this is what I’ve been reading recently: